Why a Million Dollars is Not a Lot of Money
People say they want a lot of money.
What you think is a lot of money may not be enough. Or it may be plenty. It depends on what you do with the money.
Related Post: How to Get More Income from Less Investment
Is a million dollars a lot of money?
I say maybe, maybe not. And I'll tell you why in this post.
First some clarification on what I mean by a million dollars.
Having a Million Dollars vs Making a Million Dollars
When I say a million dollars is not a lot of money, I mean having a million dollars that you can use, spend or invest.
It could be in a bank, investment account, or buried in your backyard. Somewhere you can get to it easily and quickly.
I'm not talking about making a million dollars a year in income.
That is a lot of money. And there is one type of income where it's possible to make a million (or more) each year.
I'm also not talking about net worth. Unless your net worth is all in stocks, cash or other liquid asset.
The million dollars we're discussing does not include:
- Your house
- Your car, boat or other vehicles
- Your jewelry or collectibles
- Your land
Now that we're on the same page, let's move on.
Here are 3 mistakes that make a million dollars not a lot of money.
Mistake #1- Investing Only in Stocks and Bonds
Investing the whole million dollars in the stock and bond markets is a mistake.
That doesn't mean you shouldn't have some of your money there. Just not all of it.Investing in only publicly traded stocks and bonds will ensure that a million dollars is not a lot of money.
Is it easy? Yes. Is it the most common way to invest? Yes. Is it the best use of your million dollars? No.
Here are 3 reasons why:
Stocks = Poor Diversification
Remember back to the Great Financial Crisis of 2007-2009?
It was the worst economic slump since the Great Depression of the 1930s. The stock market went down over 50%.
Personal finance experts say you should diversify your stock holdings across U.S., Europe, Asia, Emerging Markets, big companies, small companies and REITs. And you should.
This is to spread your risk.
Did that help in 2008? No. Virtually all stocks went down simultaneously.
That's not the best diversification.
Bonds are in Unknown Territory
What about bonds? Adding bonds would have helped in 2008. You wouldn't have lost as much.
Today is a different story. Bonds are paying some of the lowest interest rates in history. Trillions of dollars of bonds around the world are paying negative rates.
What does that mean for the future?
I have no idea. Is it possible for stocks and bonds to go down together? Sure it is.
Is it possible for events to happen that have never happened before? Yes.
Is there anything you can (legally) do to affect the prices of public stocks and bonds?
No. You have not control.
No Control of Either
With publicly traded stocks and bonds you have zero control.
Can you call Apple and have them change their product line? No
Can you call the Federal Reserve Bank and convince them to raise (or lower) interest rates? Nope. Not even the President can do that.
Which is my point: Having all of your million dollars only in public stocks and bonds means you'll never have control over your results.
That doesn't mean to not have a chunk of your money there. Just not all of it.
Diversifying away from public stocks and bonds will make you more diversified. You'll better withstand the next market crash or financial crisis.
To make sure a million dollars is a lot of money you need more than just stocks and bonds.
Mistake #2- Not Owning a High Income Stream
Can you make an income of 20%+ on your money? Yes.
Can you get 20% in a bank account? Hahahahahahahahah!
Can you do it with public stocks and bonds? Nope. The best you can plan for with stocks and bonds is 4% or so to start.
The only place where you can get a 20%+ income is in personal business ownership.
Don't believe me?
Here are 4 examples:
If you were to start your own side-hustle or small business, the income can be a lot more than 20% per year.
Is it a lot of work? Yes. That's why very few people do it.
If you have the willingness to bust your butt for a few years, your entire life can change.
Imagine 3-5 years from now having your own income stream. An income where you have complete control. A source of consistent revenue with no connection to the stock market.
That's much better diversification than just stocks and bonds.
Is it guaranteed to work? Of course not.
But that doesn't mean it's not worth trying.
Mistake #3- Avoiding Risk
There is a retirement crisis in the U.S.
People are not saving enough. People don't have enough invested.
I get it. It's scary out there.
The doom and gloom media like to point out every (real or imaginary) risk that you can face. You can' t turn on the TV without someone predicting that the next big crash is imminent.
But here's the irony: You're more at risk by NOT taking risk.
The biggest risk most people face is running out of money. Because they don't have enough saved. And they're not investing it for maximum long-term growth.
How can you save more money? Make more money.
How do you make more money? Start that business you've thought about for years.
People have it backwards. They think starting a business is risky. They think investing in the stock market is risky.
The opposite is true.
On your deathbed you won't say "I am so glad I was super conservative with my money and didn't get to do all that stuff I dreamed about."
No, you will regret not taking some chances. Missing out on the opportunity to fully experience life with your family and friends.
That is the biggest risk.
Oh, and running out of money because of inflation. Inflation that you can't keep up with because you're being too conservative.
If you aren't willing to take some necessary risk, a million dollars is not a lot of money.
A million dollars is not a lot of money. Unless you know what to do with it.
What would you do if you had a million dollars?
- Spend it on stuff?
- Pay off debts?
- Invest in the stock market?
- Buy/build a business?
Related Post: How to Get More Income from Less Investment